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Economic evaluation is not enough for infrastructure investments

Investment decisions typically concern monetary values; how much the investment cost and how much expected profits are and eventually investments giving the best profit will be selected. The transition in value creation is forcing companies to seek new models and means of operating and supporting their business and investments. Additionally, the need to integrate wider value perspectives into decision-making is increasing. Investments should be evaluated, selected and prioritized not only in terms of their monetary value, but also with regard to sustainability, safety, quality, social acceptability and other typically intangible criteria.

The wider value perspective has rarely been included in such assessments up to the present day. This is mainly because these value elements are typically difficult to measure solely in economic terms, and there is thus a lack of models and approaches by which to address the importance of such indirect and intangible effects. In addition, there is often pressure to demonstrate short-term effects rather than to emphasize the investment’s entire life cycle.

Investments to infrastructure assets, e.g. electricity and water networks, differs in many ways compared to investments in production industry which greatly emphasize need to examine effect of investments also beyond monetary values. Pauline Herden and Ype Wijnia [1] have discussed these differences and described characteristics of infrastructure by following aspects:

“First, infrastructure assets for energy, roads, water and telecom have a very long lifespan, objects are often designed to last more than 50-100 years. This means there is a high probability that the demands on the infrastructure will change within its lifespan.“

“Infrastructure assets have no resale value, perhaps even not scrap value because these are offset against removal costs. Thus, if an asset is acquired, it remains technically in operation until failure.”

“Given that assets will last very long and cannot be sold, the design has to be right for a very long time. This requires either flexible designs or, more likely, very robust designs. This is reflected in overdimensioned infrastructure systems, capable of handling more capacity than actually needed (e.g. electricity, gas, water).”

“Another specific characteristic of infrastructures is the longevity of the equipment. Therefore, some construction and modification may have taken place in the past when other standards for asset administration and registration applied.”

“More fundamentally, many infrastructure systems are evolutionary systems. They have not designed in a grand master plan, but have grown by many small add-ons over time, based on what already existed. Current decisions on the assets highly contains the decision space for future decisions. This is called path dependency and lock-in.”

In a recently finished research project we developed methods and tools to bring into decision making also non-monetary values in addition to economic values which obviously cannot be neglected. One of our case company was Jyväskylän Energia that owns and runs electrical power, water and district heating networks in the city of Jyväskylä. In the case study carried out with them we developed a method for selection of re-placement investments funded in the next year budget. As stated before economic indicators are not the only relevant information related to infrastructure investment decisions.

In the case of Jyväskylän Energia the main aim of renovation investment is to remove or mitigate risks of safety consequences or interruptions in distribution. Thus the developed method is based on risk analysis and provides to decision makers information about risk reduction achieved by each investment proposal compared to investment cost. In addition to examination of a single investment proposals the method suggests an investment portfolio which do not exceed given budget and reduce overall risk in the most cost-effective manner.

The keys to future success are investments whose value is not only expressed in terms of money, but also in terms of sustainability, reliability, safety, quality, social acceptability and other typically intangible criteria. Importance of non-monetary values have not been denied but comparison of investments has been very difficult because lack of appropriate methods, which are able to provide intangible values in a structured form supporting investment decision making. A workbook prepared in the Mittamerkki project presents methods to consider effects of investments in a wider perspective than only economic values.

Susanna Kunttu, Tero Välisalo

[1] Herder, P.M. & Wijnia, Y. (2012). A Systems View on Infrastructure Asset Management. In T. van der Lei et. al (eds.) Asset Management The State of the Art in Europe from a Life Cycle Perspective.